Am I getting something wrong, I can’t see payroll liabilities account in the drop-down list when creating a deduction item in the payslip.
That automatic account was removed in December 2019. You must now create your own payroll accounts. See https://www.manager.io/guides/9667.
Were you already using Payroll liabilities? If so, it should have been converted to an ordinary account.
Really, that’s fine.